The Financial Accounting Standards Board is going back to that deep, dark place where accounting standards come from - the conceptual framework that underlies it all.
FASB isn't going alone.
Holding its hand in this cooperative, philosophical expedition is the International Accounting Standards Board. Ideally, the two boards will come to similar or identical conclusions about the fundamental principles on which accounting standards rest.
The conceptual framework is a coherent system of interrelated objectives and fundamentals that prescribe the nature, concept, function, objective and limitations of financial reporting.
"This is very abstract," said FASB senior project manager Halsey Bullen. "We are a couple of steps removed from standards. This concepts project won't lead directly to any changes in financial reporting. It may remove logjams and help us reach solutions more readily, but it doesn't create standards."
Both FASB and the IASB have already established conceptual frameworks, but the frameworks don't always agree with each other.
FASB issued its current framework in the form of "concepts statements," the first appearing in 1978, and all but one coming out by 1985. The most recent appeared in 2000.
Noting that "without a set of unified concepts, standard-setters are like a ship in a storm without an anchor," Bullen said that it's time for another look at the fundamental building blocks of accounting and reporting.
"The framework wasn't really completed when we worked on it in the original effort," Bullen said. "It's been 20 years since then, and things have changed in the business world, and maybe things in the framework should change in response."
Bullen pointed out that a solid conceptual framework is essential to the development of principles-based accounting standards. The board is making an effort to promulgate standards that are based more on principles, rather than on prescriptive rules.
FASB and the IASB have been working together to develop identical or similar standards and to converge existing standards to a common form. In doing so, they have noticed that they have been basing their decisions on frameworks that are similar, but not identical.
Bullen said that the difference between the concepts of the two boards is mostly in the way that the concepts are expressed. But the differences in wording, he said, can result in differences in interpretation and subsequent differences - and conflicts - in standards.
FASB has come up against several conceptual logjams while working on recent standards. The project on liabilities and equities, for example, depends on the definition of those two terms, but the existing definitions sometimes fail to deal with financial instruments that have been created since the definitions were written.
Thorny conceptual problem
FASB has also come up against problems in its project on revenue recognition. In cases where entities are paid in advance for work yet to be done or products yet to be delivered, for example, it is unclear whether the payment is revenue or a liability. The definition of "liability" doesn't apply.
One especially thorny conceptual problem is that of measuring value. The board has found no obvious way to decide when to value at historical cost, and when at fair or market value.
The board has also encountered problems with its use of "probable." In fact, it still lacks an adequate definition of "assets." Lacking that, it inevitably struggles with the concept of "asset impairment."
Bullen said that the board would put a priority on concepts that aren't working as well as they should. "If the same problems occur across several different standards projects, and we try to solve them individually in each project, it's almost guaranteed that those answers are going to be inconsistent," he said. "That's just going to sow the seeds of further trouble."
Bullen said that he has a nightmare: that the board proceeds until it hits some kind of "irreconcilable difference" between members of FASB or between FASB and the IASB. "We could get hung up and not be able to push the rock all the way to the top of the mountain," he said. "This is especially challenging with this kind of project, because the potential effects, conceptually, are so sweeping. This is the whole foundation of accounting that is being reconsidered. Everybody in accounting has opinions on these matters, and they aren't all the same opinion."
The downside of success
Success will bring its own problems. Successful completion of the framework necessarily involves changes to various concepts. Those changes will then require changes to existing standards, changing accounting as today's accountants know it.
Theoretically, however, changing standards will not be difficult, because the concepts behind them will be clear and consistent.
The board will follow a due process similar to that of its standards-level projects. In the first quarter of 2005, the board expects to issue an initial informational "communications document" that explains the board's approach to the framework project. As it reaches tentative conclusions, it will issue exposure drafts for public comment.
The board plans to approach concepts by category. It will probably first look at objectives, then at elements, such as definitions, and qualitative characteristics. Then it will move on to operational issues, such as revenue criteria, financial statements versus financial reporting, and measurement. Then it may move on to display issues.
Though the board's decisions will have no immediate impact on financial reporting, Bullen urged corporate and public accountants to follow developments, make suggestions at any time, and participate in comments on exposure drafts.
"Cast an eye to it from time to time," Bullen said. "The problems that the board will be wrestling with in the abstract are things that accountants run into regularly, where the standards aren't written yet or where you can't figure them out or how Standard A is logically inconsistent with Standard B. Odds are these things will be debated in this project, or that we need to be reminded that they ought to be debated. You can always call us. We'll be here."
